Anticipation, uncertainty, and speculation continue to build concerning the impact on the housing market of policy shifts expected to be implemented by the incoming Trump administration. Possibly the most impactful item on the agenda for mortgage professionals pertains to the re-privatization of Fannie Mae and Freddie Mac, an effort begun during Trump's first administration.
New analysis from DoubleLine, an asset management firm, delves into the history of the government sponsored enterprises (GSEs) under conservatorship and the difficult pathway to reprivatization, including fallout for the Agency mortgage-backed securities (MBS) market.
Portfolio Manager Kunal Patel, CFA, and Analyst Alex Shvartser, shared their expectations for another push by the Trump administration to privatize the GSEs, which have been under federal conservatorship since 2008, in the research paper, "Agency Mortgage-Backed Securities: Fannie and Freddie Private Again Under Trump 2.0?".
"Privatizing the GSEs, if pursued, would be a massive and complex project that would take multiple years and likely require coordination among all three branches of government," Patel and Shvartser wrote. "While privatization has significant risks and unclear political or economic upside relative to the status quo, it is certainly possible, and there is a good chance parts of it will be attempted at some point by the incoming administration, which might be a catalyst for sporadic volatility in the Agency mortgage-backed securities market."
Ultimately, Patel and Shvartser assess it’s hard to see how GSE privatization would lead to lower mortgage rates that benefit the consumer. Privatization would carry significant execution risks and could adversely affect the secondary mortgage market, driving primary mortgage rates even higher. The authors acknowledge that the push for privatization is not surprising considering that conservatorship was never intended to be a permanent solution.
The GSEs, under conservatorship, are supported by the Treasury to maintain a positive net worth, receiving preferred shares and warrants in exchange for buying up common stock. Recapitalizing the GSEs would be a lengthy process, unless the Treasury amends rules such as capital retention requirements and acts on its shares. That could be resolved through regulators directly, but researchers add that any privatization effort would most likely need to include both administrative and legislative components.
Patel and Shvarster speculate that getting Congress to agree on legislation related to GSE privatization would be a “Herculean task.”
The big question emphasized in their paper asks: What happens to the implicit guarantee of the GSEs by the U.S. government in privatization? Uncertainty of GSE support may have an effect on primary mortgage rates, hurting consumers. Also any guarantee that goes beyond what is offered by the Treasury ($256 billion) would need Congressional approval.
Additionally, uncertainty could trigger rating downgrades of GSE-backed bonds and impact their capital treatment on bank balance sheets, which Patel and Shvartser state “would be very disruptive to the overall mortgage market.”
Monday, both Fannie Mae and Freddie Mac stocks are up about 75% in the past week and hit new highs of the past 10 years. Previously they languished between $1 and $2 a share during 2024. Today, Fannie Mae shares fell 2.4% to $4.36 after hitting a new yearly high of $5, while Freddie Mac stock also fell to $4.30 after also topping $5.
